Melanie Solomon - Investor Relations David Flynn - President, Chief Executive Officer John Ritchie - Senior Vice President and Chief Financial Officer

John Lucia - JMP Securities LLC Matt Robison - Wunderlich Securities Catharine Trebnick - Dougherty & Company Mark Kelleher - D.A. Davidson & Company

Good day and welcome to the Aerohive Networks' First Quarter 2017 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Melanie Solomon. Please go ahead.

Thank you, Noah. Welcome to Aerohive Networks' first quarter 2017 financial results conference call. After the market closed today, Aerohive issued a press release through Business Wire. The release is also available on our website at, aerohive.com. This call is being webcast live on the Investor Relations section of the Aerohive website and will be available for 30 days. Today's call is being hosted by David Flynn, President and Chief Executive Officer and John Ritchie, Chief Financial Officer and Chief Operating Officer. During the course of today's call, management will make forward-looking statements including statements regarding our projections, operating results, expectations for future revenue growth, operating profitability and operating margins, plans for future investments, product development, deployment, adoption of performance and expectations of customer buying patterns and the growth of the market for our products and business, generally. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control and the actual outcomes and results may differ materially from those contemplated by these forward-looking statements. As a result of these uncertainties, risks and changes in circumstances that could affect our financial and operating results, including risks and uncertainties included under the caption, Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations, in our recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q. Aerohive's SEC filings are available on the Investor Relation section of our website at ir.aerohive.com and on the SEC's website at www.sec.gov. All forward-looking statements in this presentation and the referenced press release are based on information available to us as of the date hereof and we disclaim any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made except as required by law. Today, we will be discussing both GAAP and non-GAAP financial measures. The non-GAAP financial measures have been adjusted to exclude certain charges and are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. For a reconciliation of these non-GAAP financial measures to the corresponding GAAP measures and a discussion of why we present non-GAAP financial measures. Please see today's press release available on our website. And now I’ll turn the call over to David Flynn, President and CEO of Aerohive.

Thank you, Melanie, and thank you all for joining us today. We are very pleased to report that we came in at the high end of our guidance range on revenue and exceeded our range on gross margin and EPS. I'm also very excited about the improvements we've made in our organization enable us to guide to a breakeven to profitable Q2. John will provide more details on how we plan to achieve this major milestone. During Q1, we launched a new go-to-market approach with our new Connect offering that provides disruptive entry pricing at the low end of our product range and a seamless software upgrade to our full featured select offering. We're seeing positive reaction to the offering in the marketplace attracting new types of customers and aiding and recruiting bars in MSPs while internally it is simplifying our business. As planned Connect is generating leads, expanding our channel and helping us to learn more of that. One important early indicator of success of the offering is a 95% increase in the number of demo accounts created per week since the launch of Connect. Connect wins in the first quarter included a medical solutions provider delivering connectivity services into hospitals, a variety of midsize businesses and managed service providers to Wi-Fi connectivity services into education and corporate environments. Perception among our partners has been very positive. One of our international value added distributors use Connect for a reseller recruitment campaign and one day of calling received interest from 100 bars. This was the kind of positive response we are looking to achieve when we brought Connect to the market. We are pleased even with the disruptive pricing on our Connect offering, our margins were strong in the quarter compared to our guidance which shows that our existing customers continue to appreciate the rich software value we provide with our select offering. That brings me to the significant progress we've made in our products organization and our transition to HiveManager NG. The organizational changes we made have dramatically improved our pace and quality of execution on NG. This has gone a long way towards accelerating our transition to NG and improving our sales cycles. This improved product execution is also leading to increased energy and results from our sales force as we saw in our Q1 results in the Americas. We expect Europe to follow a similar trajectory, but one to two quarters behind. We're already seeing encouraging signs such as a HiveManager NG deal that we won with a European fashion retail group which placed their first order for a unified brand solution using our Wi-Fi and switches. They are moving away from Cisco initially deploying us in 200 stores and what is expected to be a global wrought across 1000s of stores. Other recent wins in the quarter supported by continued innovation in our underlying networking solution. The unique Dual 5GHz capabilities of our Wave 2 portfolio give us significant differentiation which is driving new wins and upgrades. In the U.K. we won a project with a large regional NHS Trust which is deploying 500 of our Dual 5GHz AP250 into their acute care hospitals. At a top 50 U.S. School District which has been a large customer since 2013 placed a seven figure order to upgrade their infrastructure from 802.11n to AP250s to realize the perform advantages of Dual 5GHz. These deals contributed to our Wave 2 sales increasing to 44% of our access point sales in Q1. At the same time, we are already hard at work preparing for the next generation of Wi-Fi technology 802.11ax, which is expected to deliver improved performance, capacity and range as well as power advantages, which should encourage adoption by mobile device manufacturers. We believe these advantages are more compelling than we have to use advantages are, which should drive comparatively more interest across the industry in ax and more demand from customers to upgrade. We are excited about the technology and are executing on plans to be an industry leader in the launch of 802.11ax products in 2018. Next I wanted to highlight our progress on increasing our recurring revenue streams. We've been pleased with our very strong growth in recurring revenue, reaching over $9 million in Q1, 24% year-over-year growth and accounting for more than a quarter of our revenue in the quarter. This was driven by both increased movement towards our subscription base public cloud offering, which accounted for almost 50% of our business in Q1, up from 40% a few quarters ago, as well as an increased focus on renewals. We expect this revenue line will provide increase predictability in our quarterly results. We continue to focus on diversifying our business. We've made significant progress in higher education, which is unrelated to E-Rate with wins including Arkansas State, University of Tennessee, University of West Georgia, State College of Florida and one of the largest universities in Mexico with over 150,000 students. And finally, our partnership with Dell continues to progress well and contributed to many of these university wins. Dell business was material for the second quarter on a row and we expect it to be material contributed to our business for 2017. In summary, we believe that the major challenges that affected our results beginning the second half of 2016 are now behind us. In Q1 we saw that our recent changes of led to improved execution and operational efficiency, we believe we are now back in more positive trajectory and are poised to resume year-over-year growth in the second half of 2017. I’ll now turn it over to John to discuss our financials in more detail and provide our Q2 guidance.

Thanks Dave. Good afternoon, everybody, and thank you for joining us here today. Before we go through the quarter in detail, I’d like to highlight some financial and operational milestones achieved during the quarter. Q1 marks the seven sequential quarter of gross margin improvements for our software and subscription business. As Dave mentioned, this business grew 24% on the year-over-year basis. Looking forward to Q2, although we don't typically provide revenue guidance on a product line basis and don’t – intend to do so in the future, we do expect to achieve an important milestone of more than $10 million in revenue on our software and subscription business in the second quarter. And more broadly, our team focus on making the business more efficient has allowed us to lower, the non-GAAP breakeven point in the business to $42 million of revenue. During the balance of my prepared remarks, I will cover our GAAP and non-GAAP P&L, our balance sheet for the first quarter and provide some related commentary on our business. And lastly, I will close by reviewing our financial guidance for the second quarter of 2017. Now moving on to revenues for the first quarter they came in at $36.4 million, which was at the high end of our guidance range, this was down 9% on a year-over-year basis and down 13% sequentially. The sequential decline was in line with the expectation we laid out in our previous earnings call and consistent with our Q4 to Q1 seasonality. Product revenues were $26.9 million and software subscriptions contributed a healthy $9.5 million to the total. Despite the revenue challenges, we have experienced over the past few quarters. We continue to make progress increasing our recurring revenue streams. The recurring revenue increases, the visibility and predictability of our business model. Q1 was a record for software subscriptions revenues coming in at 26% of total revenue, an increase of 24% compared to the same quarter a year ago then increase of 8% on the sequential basis. The software subscription revenue line will be a key contributor at our goal of achieving profitability in 2017. We believe our recurring revenues will increasingly differentiate our business model and as a critical component of our strategy as we move forward into 2017 and beyond. On a geographic basis, revenue in Americas were $23.9 million or 66% of total revenue, essentially flat on the year-over-year and sequential basis. Overall the Americas regions performed well in the face of our recent challenges. Moving on to the EMEA region, revenues for Q1 came in at $9.8 million at increased $5.2 million or 35% sequentially and $2.2 million or 18% on the year-over-year basis. As expected during Q1, Europe was impacted by the product transition challenges we saw in Q4 in the Americas. We anticipate this region to show improved sequential performance as we move into the second quarter. Q1 revenue for the Asia PAC region was $2.6 million, a decrease of four $400,000 or 14% on a sequential basis and $1.2 million or 31% on the year-over-year basis. As we have mentioned in the past, we expect results from this region to continue to be volatile driven by lumpy deals off of a small revenue base. As a reminder, our international business is a material portion of our revenues and it's important to remember that we bill all locations in USD, so we may see pricing pressure during the extended periods in which the U.S. dollar is strong. Now I'll turn the discussion towards our non-GAAP margins and expenses. Q1 gross margin was 68.2%, up 70 basis points compared with the 67.5% in the same period a year ago, and down from 68.8% recorded in Q4. Product gross margins for the quarter came in at 67.9% approximately even compared with the same period a year ago and down as expected from 68.8% in the fourth quarter. The modest decline in product gross margins was related to two factors. Lower product revenues over a fixed cost base and to a much lesser extent the introduction of our connect product line. Software subscription and services gross margins were 69.2% in Q1, up 370 basis points compared with the 65.5% in the same quarter a year ago, and up 50 basis points when compared to the fourth quarter. Moving on to operating expenses, operating expenses in total were $28.7 million for the quarter down $4.5 million or 13% when compared to $33.2 million in the same quarter a year ago and down $2.3 million or 7% for the $31.1 million in the fourth quarter. The year-over-year reduction in operating expenses was related to our previously announced cost reduction actions taken early in Q1. These actions have a very positive impact on our business overall. We believe today that we are little faster in a much more responsive organization. For example, the productivity our engineering team has increased dramatically in the short period of time since we've taken these actions. Research and development expenses for the quarter came in at $8 million or 22% of revenue compared with $8.9 million or 22% of revenue in the same period a year ago and this compares with $8.9 million or 21% of revenue in the fourth quarter. Sales and marketing expenses came in at $15.9 million or 44% of revenue in Q1 down from $17 million or 41% of revenue compared with the fourth quarter of 2016. On a year-over-year basis, sales and marketing was down from $19.3 million or 48% of revenue. The decline in sales and marketing expenses was primarily related to our lowering of our variable sales compensation costs. Lastly, G&A expenses came in at $4.8 million or 13% of revenue in the first quarter compared to $5 million or 13% of revenue in the same period a year ago. This compares to $5.1 million or 12% of revenue in the fourth quarter. As we mentioned last quarter, the key takeaway regarding our functional operating expenses is that we have built variability into the cost structure which now scales more appropriately with the performance of our business. Our overall operating margin loss was 10.8% compared to 15.2% in the same period a year ago and 5.7% in the fourth quarter of 2016. Also on a non-GAAP basis, we reported a net loss of $4.1 million in the first quarter compared with a net loss of $6.2 million in the same quarter a year ago and compared with a loss of $2.3 million in Q4 of 2016. This translates to a net loss per share in Q1 of $0.08 compared to a net loss of $0.13 in the same period a year ago and a net loss of $0.04 in the prior quarter. The net loss per share in Q1 is based on a weighted average common shares outstanding number of 52.4 million shares. On a GAAP basis, in Q1 the net loss was $0.17 per share compared with a net loss of $0.25 per share in the year ago period and a net loss of $0.14 per share in the prior quarter. Our Q1 net loss included stock-based compensation expenses of $3.6 million. Now moving on to the balance sheet. Cash and short-term investments at the end of the quarter were $74.8 million. Inventory levels decreased $900 million to $11.7 million at the end of the quarter compared to $12.6 million at the end of Q4. The decrease in inventory was related to a continued focus on improved balance sheet and inventory management. Accounts Receivable decrease to $21.6 million as of the end of March compared to $26.2 million at the end of the fourth quarter. DSOs decreased from 58 to 54 days. The improvement in the DSOs is related to approved shipment linearity within the quarter. Now moving on to guidance for Q2 of 2017. We currently anticipating revenues in the range of $42 million to $43.5 million. On a non-GAAP basis, we expect gross margins to be in the range of 66.5% to 67.5%. Driven by of our new connect product operating, partially offset by improved margins from our software subscription business. On a non-GAAP basis, we expect our operating margins to be between breakeven and positive 1.5%. We expect other income and expenses, including tax expense, to be approximately $100,000 in the quarter. Lastly, we expect non-GAAP EPS in Q2 to be between breakeven and earnings of $0.01 per share. Since our earnings range reflects positive earnings. The share count for EPS will include shares that we're previously anti-dilutive. Given this the estimated share count for EPS purposes will be 54.3 million shares. On the GAAP basis we expect Q2 loss to be between $0.08 and $0.09 per share using a share count of 53.2 million shares outstanding. We are pleased that a result of the actions that we've taken both on the cost side and the organizational structure side of Aerohive. We expect to reach our goal of breakeven the positive EPS with approximately $42 million in revenue. In addition, we are pleased that this goal is achievable within our Q2 revenue guidance. And most importantly, we plan on meeting this goal while maintaining a level of investment in the business who will allow us to grow and prosper in the future. Now with that, I'll turn the call back over to Dave for some additional remarks.

Thanks, John. We remain committed to diversification expanding our product offering increasing our go-to-market efficiency and becoming profitable. I'd like to thank our customers and employees for contributing to a solid start to 2017 in a demanding environment our dedicated employees have proven they can be nimble and drive the changes that our business needs. I look forward to keeping you updated on our progress. I will now take your questions. Operator?

Thank you. [Operator Instructions] We’ll take our first question from John Lucia with JMP Securities.

Hey guys, congrats on a nice quarter here.

Thank you, John.

So you guys talked about connect garnering a lot of interest it all sounds very positive. But I am just wondering as a customer interest turn into sales, what kind of impact do you expect that to have on gross margins in Q2 and then through the rest of the year will that have a greater impact on gross margins will remain kind of relatively flat with what you see in Q2?

So for Q2 it's baked in. This is John speaking. There is baked in the guidance we gave a 66.5% to 67.5%. Now it's having less impact on the product gross margins that we – originally intended, but offsetting that we're seeing better improvement in the service and subscription gross margins. So on a combined basis, we think gross margins will remain healthy in Q2 and we don't see at the risk of breaking the rules are not going out too many quarters. We don't see significant pressure moving out through the balance of the year.

Okay. That's helpful. And then the next question I know the E-Rate commitment activity had been pretty strong at the end of 2016 and the beginning of 2017. How much of kind of that positive results that you saw in Q1? Can you attribute to the E-Rate business in K-12 in general versus other sectors enterprise and higher [indiscernible]?

Yes, our education mix in Q1 of this year was pretty similar to education mix last year kind of mid-30s – our K-12 mix composition. So I didn't know – there wasn't a material blip for E-Rate. I think you have the quarter-over-quarter, education actually grew a little bit from Q4 to Q1, which that just Q4 was depressed because of the delays and getting funny letters out till the very end of the day. So kind of feel like we're it's flowing and at a reasonable rate kind of booking some of the projects that we can they book from Q1 to some Q2, some Q3, there's no big blip or no big bubble of the E-Rate stuff, but more of a steady flow taking last year's wins off the table.

Okay. And then my last question is just on your partnerships with Dell mostly and then also if you touch on Juniper, I would just be curious – how would you compare the level of engagement that you've seen with Dell quarter-over-quarter and the same question would go for Juniper?

Yes, I think in Dell, we continue to make progress every quarter with more engagement across more parts of the sales organization. They did go through their restructuring end of January, early February. So there's a lot of – with the new people are in the different roles. But most of the core people, we've dealt with are still in enroll and engaged at work a lot of engagement got a team with six Dell people sitting in the conference room next to us right now working on continuing to progress the relationship and to expand it into as we go forward, so positive engagements and the results is that we're material for the quarter.

Okay. And last question did the Dell increase as a percentage of revenue or decrease or stay flat with Q4?

So we're not going to disclose that, but I will give you some a little bit of additional color around that. So you can figure out where we're going to actually when we talked about Dell being material in 2017 for the full-year. Our expectation was we would build towards that on a cumulative basis it would be material at the end of 2017. We're very pleased that they've been made their material starting in the very first quarter of the year. So the relationship is going I think exceptionally well and we expect it to be material as we move forward and it’s not a direct answer, but we're not going to give a percentage breakout for a particular customer.

That’s really helpful, perfect. Thank you, guys.

Hey, John I realized I didn’t answer your Juniper question. Okay, I think in general Juniper's probably continuing as is we engage with the sales force as joint projects. They invited us to be part of their technology advisory board and higher end vertical, and we participate in those events, got a bunch of leads out of it, they hope to come opportunities, but as I said a very different relationship. Dell as we saw relationship where their people are paid and Juniper is meeting the channel relationship that's constructive, but not as I'm not as direct or material as well.

Okay. Thank you.

We'll take our next question from Matt Robison with Wunderlich.

Hey congrats on the progress. So couple questions, one, I’m wondering if you got any comment about E-Rate in the new administration, there's been some discussion in the media about an orientation more towards lower even not have an E-Rate potential in any more, I wondered if you could comment about the direction you're seeing? And then also are you pretty much completed getting NG, where needs to be in terms of the features to reduce the sales cycles and what has happened with sales cycles in the last quarter or so?

Yes, so first take the E-Rate question. So we're not seeing any signs of them moving away from the E-Rate program. In fact we've seen some of the opposite where probably the new chair of the SEC published a scathing letter towards the people that administer USACK, which is the organization under the SEC that disperses the funds and it's the letter of public record, it's entertaining reading if you want to see the administration's coming down on the sloppy execution. But he is demanded by about mid May, come back with a plan to clean up their act and fix their online portal, get the administers, simplify the process, get the funds dispersed more quickly and so there's a bright spotlight on it and I think one of the analysts actually published that letter and note recently. So we see focus on improving the operational efficiencies to be determine how long that takes the pace the government moves at, but we're encouraged by the fact that there's a brighter spot that shown on the problems that have been playing the program. So turning to the NG issue, so as I said we’ve made major progress during the quarter. The changes we made in the leadership and engineering and some of the structuring have lead to a kind of a dramatic improvement in terms of pace of execution and velocity and put out three very significant releases during the quarter or monthly releases are on time, high quality, feature rich and so very excited about that. So I think it is now meeting the needs of the vast majority of the customers and it is helping to reduce the sales cycles in the U.S. where we started the sales cycles while we pushed NG earlier into the U.S., so they're kind of working through those elongated sales cycle and seeing those compressed. The European team introduced NG a little later into some of their markets, so they're still seeing some of those issues as people get used to the product and go through the cycle, but we anticipate that to improve over the next one to two quarters. So a little bit more work to be done, but feeling really good about the progress we made.

So it sounds like you're feeling likely 90% there or more.

So I’ll put a number on it. So in terms of the bulk of customer in terms of meeting 90% of the customer needs, yes, I think the last 10% there's more work to meet the last 10% of those customers needs, but it will get better and better every month over the next several quarters. The good news is the team is cranking and getting out a lot of stuff every month and it's been very well received by customers and the sales force, so excited about the progress.

Our next question is from Catharine Trebnick with Dougherty.

Thanks for taking my question. Could you just describe a little bit on how much revenue through the indirect channel. And then just in general how that channel was performing in North America? What you're doing from a marketing aspect to make sure that those channels are successful? Thank you.

Yes. We do the 100% of business through channels through resellers and distributors. I assume you're talking about in North America we do two tier through SYNNEX. We do kind of about half of our business through the SYNNEX, but channel the largest bars as we do directly in North America and the medium to small bars we do through SYNNEX. So I assume that you mean by the indirect that suits your model. So I think we are marking a good progress with SYNNEX, especially they are using the connect tool as a recruitment tool to help to improve giving more of ours engaged and brought on board. We have Michael O'Brien running the channels for – our VP of Channels has been with us for last couple of year, smart channel guy augmented by the addition of Ron Gill who also knows channels very effectively. So I think they are running recruitment campaigns and recruiting and developing the bars and utilizing connect to help with it. It's always an ongoing effort and we will be working on strengthening the channel by the entire life of the company, because we’ll always be looking to add more channels as we grow the company.

The only color I would add to that is there were certain operational efficiencies we expected to gain when we first engaged within the SYNNEX relationships and those have worked out, right. You see that in our cost structure, we're definitely getting the advantage and I think every day we see the advantage of the two tier distribution model. So we're pleased with how it is. We've had people who have significant background in two tier distributions. So it's working out well for us. Important thing, we’ve been two tier and then actually since the day one of the company, so for long time had that two tier model.

[Question Inaudible]

Yes, so this was that we should referring back to Q4. I would say we're seeing the same strength. Yes, we're seeing same strength with that relationship is material if you assume kind of similar deal sizes quarter-to-quarter you get to roughly the same number.

Yes, I think our intend wouldn’t be to break those out on a quarterly basis, I think we just convey that to make sure there's a clear picture that the Dell business is a range and we've got some big – seven bigger deals we've done with Dell and this time transactional business is deals that are 10 and 20-K and there's a profile that looks kind of similar to us and we want to appreciate that it's not two deals driving the business, but probably won't track by channel number of transactions on a go forward basis. But it is broad-based – big deals in broad-based at the same time.

All right. Thank you. One another question on the – just talk about the mid-30s for your enterprise, whole goal in the last has been telegraph you want to expand our –vertical and now that yet given any color on health care were talent how is the expect to the other target markets growing, please updates on that. Thank you.

Yes, so we continue to be happy with the progress and results in those other verticals. We're doing significant transactions in those. As I said, at the top level of mix that the K-12 mix was kind of fairly consistent year-over-year so if you look at just those macro numbers you said quite didn't change it has moved as much as we'd like it to move we are continuing to look forward on that, but some of that was because education delayed a little bit out of Q4 into Q1 made it marginally stronger. That hadn't happened the mix would have been a little bit stronger towards the enterprise.

Yes, layered on top of that, you also got to consider that the regional mix we had this quarter. Europe was weak because of the topics, we mentioned. So that kind of skewed you to a more North American centric business and that business is more rely on education in the European business.

All right, thank you.

We'll take our next question from Mark Kelleher with D.A. Davidson?

Great. Thanks for taking the questions. Just a couple of follow-ups on that last question, first on Dell, is the vertical breakout that you're selling through Dell similar to the vertical breakout of the company in general?

Yes it has been pretty consistent in terms of what we see both in terms of the mix of deal sizes as well as the verticals. It's been relatively consistent. We are seeing a little bit more – Dell helping some in the universities. I mentioned a number of university deals, we had one and Dell definite help in some of those. And we're actually seemed to help quite a bit right now in some of the Healthcare business and in fact particularly in the UK, I mentioned, and then NHS, there's some really nice things happening in the NHS in the UK health business.

Okay. And then you touched on the international business. Is there effort or a focus you could make there to overcome some of the macro issues that are ongoing there or offset some of those a bit investment there that could be made to prove that?

I think the short answer is yes and we are, but we're coming off a small base. So I think you might be referring to the kind of the lumpy nature if you look at that historically. I think just talking about Asia-Pac region.

I think you are talking about the European results.

Yes, EMEA down 18% year-over-year and APAC down 31% year-over-year.

Yes. I think the big thing with EMEA is we indicated last quarter that we saw elongated sales cycles that transition with the HiveManager NG platform. We had first brought NG into the Americas market and pushed it much more aggressively in the Americas in the later part of last year. And so I think Americas went through some of those elongated sales cycles and they've now coming through it and actually had a quite strong Q1. Our view is that the European is really just a matter of driving through that same transition. It’s something that naturally will just take a quarter or a couple quarters to kind of work through and we should come through it just like we saw in the U.S. So we don't think it's a major investment or a change in strategy, it's more of a perseverance and persistence on driving the transition and getting over on to the next-gen platform.

Okay, thanks. End of Q&A

And that will conclude today's question-and-answer session. I would now like to turn the call back over to David Flynn for any additional or closing remarks.

Thank you all for joining us today. We will be at the Needham Conference in New York later this month. I hope to see many of you soon. Good night. Thanks for joining.

And that does conclude today's conference. Thank you for your participation and you may now disconnect.